2023-8-7 16:59 |
Despite a strong bounceback thus far this year, the majority of cryptocurrencies are far below their peaks from the hysteria of the pandemic bull market in 2021. However, there is one notable exception: Tether.
The controversial stablecoin’s market cap is now at an all-time high, just shy of $84 billion. Remarkably, this comes as capital has flooded out of the crypto space – in the last year, the total stablecoin market cap is down 18%, whereas Tether’s is up 26%.
If you hit “play timeline” on the below chart, Tether’s growth in the last year contrasts starkly to the trajectory of all the other major stablecoins, which have gone firmly south.
If we now present the above chart in static form and assess market share rather than market cap, there are a couple of notable dates. The first is May 2022, when the Terra ecosystem death spiralled to zero, dragging its $18 billion stablecoin with it.
But while this gave a little boost to Tether, it also briefly depegged at the time and hence the real winner was USD Coin, which swiftly jumped from a 25% market share to 33%.
However, it is really 2023 that has seen Tether become truly dominant, rising from a 48% market share at the start of the year to its current position of 67%. The next chart shows it as the outlier, with all other major stablecoins.
Why is Tether gaining market share?There are three main factors for this. The first is regulation, specifically around the Binance-branded BUSD stablecoin. Paxos, the New York-based issuer, announced in February that it would no longer mint new tokens of the stablecoin, meaning its market cap would gradually dwindle down towards zero (as of time writing, it still holds a 2.9% market share with a market cap of $3.7 billion, but this should continue to fall).
Tether is based outside of the US and hence concerns over its status with regard to US securities laws is not a concern.
The second factor served to hamstring another one of Tether’s rivals, USD Coin, which also needs to worry about US securities law, being based in Gary Gensler’s remit. But additionally, there was a visible dip in the Coinbase-backed stablecoin’s market cap in March, with Tether sucking up the capital fleeing USDC. This was due to the banking crisis, with it revealed that USDC was partially backed by cash reserves held in the fallen Silicon Valley Bank.
Amid the panic, Circle confirmed that 8.8% of reserves backing USDC were held in SVB. While it was later confirmed that depositors would be made whole, USDC had depegged to 88 cents in the meantime and while it immediately took back its $1 peg after the guarantee was confirmed, it has not since recovered the loss in market share.
The dominance of Tether has hence grown, ironically seen as “safer” amid the chaos, despite the concern over Tether’s reserves being possibly one of the longest and most discussed topics in crypto.
This takes us to our third factor: it is probably fair to say that the market is a little calmer with regard to the reserve situation behind Tether. The company has made efforts to increase its transparency, and according to accounting reports, has cut its exposure to certificates of deposits and commercial paper.
The majority of its reserves now lie in T-bills, no doubt helped by the stout yields on offer, with interest rates now north of 5%. Indeed, Tether announced this week that it made over $1 billion in operation profit in the second quarter of 2023, with its assets rising 5.7% to $86.5 billion, against $83.8 billion of USDT tokens in circulation. The bumper profits were led by T-bills, with the firm holding $72.5 billion of its $86.5 billion in the US government-guaranteed instruments.
However, it is important to state that these reserve “attestations” are not the same as full financial audits, and there does remain concern in some quarters. Certainly, comparing to the traditional finance sector and the transparency that is commonplace, Tether pales badly in comparison and needs to do more. But the market at large has certainly softened on its opinion of the situation – evidenced in the tremendous growth of the stablecoin, especially at a time when the overall stablecoin market cap has tumbled.
The break in pattern over the past year is notable, and can be seen through an alternative angle in the next chart, when the market cap of Tether is compared to that of Bitcoin. Historically, the duo have moved tightly, seeing as Bitcoin is a bellwether for a space at large, and the more demand for Bitcoin, the more demand there is for Tether.
But while Bitcoin remains 58% off its all-time high, Tether has surged back to its peak – wiping out the bear market dip entirely.
What does this mean for crypto?We mentioned the concern around Tether’s reserves above, and it is therefore unsurprising that many are unenthused that the stablecoin is commanding such a large hold of the market. Without any doubt, were anything to happen to Tether, the space would be absolutely ravaged. It is the main source of liquidity on all trading pairs, DeFi is dependent on it, and it is the lifeblood underpinning the entire ecosystem.
While the situation around Tether has been well covered and we won’t delve into it again here (and as we mentioned above, it at least seems to be going in the right direction), there do remain other points of contention. The irony of all this is that, in a space which is built upon the pillar of decentralisation, so much is dependent on one very centralised company.
DeFi gets its name from decentralised finance, but that is nothing more than a misnomer while so much of the system is propped up by Tether (not to mention, USD Coin is also centralised, the next biggest competitor). Even if all is good with Tether (and to be clear, there is no evidence to the contrary), it remains a central point of failure, and DeFi will never be decentralised as long as it’s built upon USDT.
Then again, this would not be an issue if Tether was fully regulated and transparent, which it seems to be headed towards (Even if slowly). That would likely solve all problems because there is certainly no issue with the token’s functionality: it does exactly what it says on the tin, and within a DeFi space that is far more centralised than many realise for a variety of reasons, it does not feel like an issue that Tether is centralised – it’s merely the fact that the trust behind that centralised institution cannot be guaranteed.
Without getting too philosophical, some may argue that it is impossible to ever gain that level of trust in a centralised company. Indeed, that is the embers out of which the cryptocurrency space was born, and a discussion for another day.
But one this is clear. Looking at the numbers, the market cap and market share has only been going in one direction for Tether: up. Time will tell if that continues, but right now, its dominance is staggering.
The post Tether’s market cap hits all-time high, the great irony of DeFi appeared first on Invezz.
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